New CEOs and Corporate Strategic Refocusing: How Experience as Heir Apparent Influences the Use of Power

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Chief executive officers (CEOs) have long been recognized as the principal architects of corporate strategy and major catalysts of organizational change (Andrews, 1971; Child, 1972), and the extent to which CEOs can effect change in corporate strategy is thought to be determined largely by the power they possess and how they decide to wield it (Child, 1972). Despite the apparent centrality of CEOs' power to the phenomenon of firm-level strategic change, however, research on this relationship is severely limited (Hardy, 1996), and an empirical association between these two constructs has yet to be established. This is surprising, given that the research on CEOs' power is extensive, having identified a wide variety of important organization-related outcomes on which powerful CEOs may have a significant influence, such as the structure of their own compensation packages (Westphal and Zajac, 1994, 1998, 2001), their firms' board composition (Westphal and Zajac, 1995) and financial performance (Haleblian and Finkelstein, 1993; Daily and Johnson, 1997), their successors' characteristics (Zajac and Westphal, 1996a), and their own job security (Boeker, 1992).

The dearth of research on the relationship between CEOs' power and corporate strategic change may be a reflection of how studies of CEOs' power have typically been conducted. By and large, these investigations have modeled and tested direct associations between power and the outcomes of interest, but power represents simply the ability to bring about a preferred or intended effect (Weber, 1947; Dahl, 1957; Russell, 1957). Consequently, the theoretical linkage between CEOs' power and its consequences requires an understanding of CEOs' preferences and intentions (i.e., cognitive orientation). Furthermore, hypothesizing direct connections necessitates that cognitive orientations be uniform and motivating across CEOs. For example, Zajac and Westphal (Westphal and Zajac, 1994, 1995; Zajac and Westphal, 1995, 1996a, 1996b) have examined how powerful CEOs may influence a number of board-level decisions. In these studies, CEOs' cognitive orientations played a critical role in establishing the direction of the hypothesized associations between power constructs and outcomes, but the CEOs' cognitive orientations were not assessed. Instead, convincing theoretical arguments or plausible assumptions were made for CEOs' likely preferences. For instance, Zajac and Westphal drew on psychological, social psychological, and organization science literatures to argue that CEOs ordinarily prefer successors (Zajac and Westphal, 1996a) and new board members (Westphal and Zajac, 1995) who are demographically similar to them. Likewise, they made the plausible assumption that CEOs prefer director candidates with prior experience on passive rather than active boards, because they are primarily interested in controlling their own boards (Zajac and Westphal, 1996b). Their empirical findings generally supported their hypotheses.

In contrast to the preferences and intentions associated with the power outcomes previously studied, CEOs' cognitive orientations toward corporate strategy appear to be highly variable. For example, some senior managers are apparently much more committed to the strategic status quo than others (Hambrick, Geletkanycz, and Fredrickson, 1993). How a CEO decides to use his or her power to influence a firm's strategic direction is likely to be affected by his or her cognitive strategic orientation, such that power and cognitive orientation interact to influence firm-level strategy. Therefore, predictions about how CEOs may use their power to influence corporate strategy require a means of modeling and explicitly assessing not only CEOs' power but also their cognitive orientations.

In this study, we examine how newly appointed CEOs' power and cognitive orientations interact to influence a challenging type of strategic change, referred to as corporate strategic refocusing. Newly appointed CEOs often take office just prior to major corporate-level strategic change initiatives (Kesner and Sebora, 1994; Westphal and Fredrickson, 2001) and, thus, are likely to be heavily involved with organizational change efforts. Whether they use their power initially to support the status quo or engage in corporate refocusing may depend on their experience as "heir apparent," which represents the extent to which they have been socialized to the CEO position by their predecessors. Heir apparent experience entails a cognition-shaping set of insider-related events that has particular bearing on a new CEO's strategic change preferences and intentions. We concentrate on corporate refocusing here because it appears to be a sufficiently challenging kind of organizational transformation so as to require both a shift in strategic orientation and a level of power that other kinds of strategic change do not. Therefore, it should be an appropriate context in which to study the effect of CEOs' power.

CEOS' COGNITIVE ORIENTATIONS AND CORPORATE STRATEGIC REFOCUSING

Challenges of Corporate Strategic Refocusing

Empirical studies have shown that strategic refocusing has become a major and increasingly prominent corporate phenomenon over the last two decades, as witnessed by the ever-increasing rate of acquisitions and divestitures (Bowman and Singh, 1990). The acquisition of related activities and the divestiture (e.g., the spinning off or shutting down of establishments or entire lines of business) of unrelated, peripheral businesses reflect a strategy of corporate refocusing (Stewart and Glassman, 1988; Lichtenberg, 1992; Markides, 1993; Comment and Jarrell, 1995; Liebeskind, Opler, and Hatfield, 1996). For instance, Markides (1990), in his study of Fortune 500 firms, found that as much as 50 percent of the sample of firms he studied had undergone some type of refocusing. Comment and Jarrell (1995) found that a significant reduction occurred from 1978 to 1980 in the number of industries in which firms participated, from an average of 4.17 to 2.95. Similarly, Zuckerman (2000), in documenting the de-diversification strategies of public firms during the 1980s and 1990s, found a significant decrease over time in the mean number of industry segments in which firms participated. In addition, strategic refocusing has emerged as a principal means by which managers can enhance their firm's market value (see Stewart and Glassman, 1988; Lichtenberg, 1992; Markides, 1992; Comment and Jarrell, 1995; Journal of Financial Economics, 1995, Special Issue on Corporate Focus). The elimination of business activity peripheral to the firm's core focus and competencies and in which the firm's competitive position may not be as sustainable has been found to lead to improvements in both operating performance and stock market valuation (John and Ofek, 1995).

For several reasons, corporate strategic refocusing tends to represent a much more definitive departure from a firm's strategy, especially for large and already diversified firms, than increasing diversification. First, the purposeful reduction in firm scope runs counter to the prevailing business strategy of growth through diversification that has dominated corporate America since the merger boom of the mid-1960s and that has historically determined the basis of CEOs' compensation (Amihud and Lev, 1981; Murphy, 1985; Jensen, 1993). In addition, corporate refocusing represents such a substantial departure in strategy because it entails the unequivocal negation of previous strategic decisions through the highly conspicuous and frequently traumatic acts of judging a business unit or activity to be peripheral or low in value relative to the firm's core assets and then shutting it down or spinning it off (Bowman and Singh, 1990). Corporate refocusing may thus result in selling non-core business activities that have a higher value to the acquiring firm than to the parent, such as GM's attempts to sell its Hughes Direct TV satellite business to another satellite TV company at first (i.e., Echostar) and then to SBC Communications. Further, individuals with vested interests in the survival of business units targeted for dissolution are likely to resist it intensely, and often the divestment of poorly performing acquisitions follows the departure of the CEO during whose tenure the acquisition was made (Weisbach, 1995). In contrast, diversification does not necessarily involve highly explicit reversals of prior strategic choices or the dismantling of organizational units on which some individuals' livelihood or reputation depend. As a result, corporate strategic refocusing is likely to represent a more challenging strategy for the CEO to pursue than further diversification.

Heir Apparent Experience

Upper echelons research has examined how top managers' cognitive orientations influence the decision-making processes related to firm-level outcomes, such as corporate strategy (e.g., Hambrick and Mason, 1984; Jackson and Dutton, 1988; Starbuck and Milliken, 1988; Isabella, 1990). A number of studies have established an association between top managers' strategic orientation, as indicated by various demographic characteristics signifying particular kinds of experience, and the strategic adaptation of the firm to its environment (Hitt, Ireland, and Palia, 1982; Gupta, 1984; Chaganti and Sambharya, 1987; Walsh, 1988; Govindarajan, 1989). A basic premise of this research is that executives' different career paths and personal backgrounds result in their having different cognitive perspectives (Daft and Weick, 1984; Fiske and Taylor, 1984; Lyles and Schwenk, 1992). Therefore, studies in this area have frequently employed key background characteristics, such as age or organizational tenure, as crucial proxies for elements of top managers' cognitive strategic orientations (e.g., Hambrick and Mason, 1984; Tushman, Virany, and Romanelli, 1985; Wiersema and Bantel, 1992; Ocasio, 1994; Boeker, 1997). Yet another background condition that is likely to have shaped top managers' strategic preferences and intentions is time spent as president or chief operating officer (COO)--i.e., experience as heir apparent.

Individuals in the president or COO position are usually regarded as heirs apparent (Vancil, 1987; Cannella and Shen, 2001), and incumbent CEOs often explicitly groom these people to be their successors. Experience as heir apparent affords great familiarity with, socialization to, and involvement in decision making at the very top of the organization before a person assumes the CEO position. Given the potential intensity of socialization at the top of the organization, the unique nature of the CEO's job, and the involvement in corporate strategy by individuals occupying the president and/or COO positions, experience as heir apparent is likely to bear much more directly on the strategic orientation of the newly appointed CEO than experience associated with any other organizational position. …

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